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Ideas for improving tax credits for homebuyers

Ronald S. Temple, portfolio manager and co-director of research of Lazard Asset Management in New York, is one of the more bearish prognosticators of housing prices these days: He sees another 15% to 20% decline in national home prices from here and several years before the market recovers. But Temple is not all doom and gloom. He thinks that if we tweak the new rules on first-time homeowner tax credits, the declines might not be as dire.

Temple says that there are two incentives for new homeowners that are notable:

The first is part of the federal fiscal stimulus plan signed by President Obama. It includes a tax credit for up to $8,000 for first-time homebuyers with income less than $150,000. Here’s a link to some background.

In California, a state tax credit for new home purchases amounts to the lesser of 5% of the purchase price or $10,000. This credit has no income limit. The total tax credit available is $100 million, of which $40 million has been tapped so far. Here’s another helpful link.

Both of these programs have problems, says Temple. The federal program, he says, is “too small and too limited in scope given the income and first-time buyer restrictions.” And in California, since it’s only for new homes, it actually encourages an increase in the supply of homes. So much the better if the credit were designated for existing homes instead, he argues. “That would be a better intervention because the market decides,” he says. “You put in an expiration date and you don’t need a permanent tax cut. … The appeal is bipartisan, as you reduce the tax burden on American families during a period of economic stress while helping them to own a home.”